Expenditures around episodes of hospitalization vary widely across hospitals. In our recent national study. Medicare payments for inpatient surgery differed 10% to 39% between the least and most expensive hospital quintiles, after adjusting for price differences and case mix. Aiming to reduce such variation, CMS is moving steadily toward bundled payments, which would provide a single lump sum to hospitals, physicians, and other caregivers involved in care around hospitalizations. The hope is that bundled payments will give hospital and physicians stronger incentives to coordinate care and reduce the use of unnecessary services. Extending our previous P01-funded research, this project will explore determinants of variation in hospital payments, incorporating both claims data from the under-65 population and clinically rich outcomes and safety culture information from 50 hospitals in Michigan. We will also evaluate the direct and indirect consequences of the Center for Medicare and Medicaid Innovation's (CMMI) recent bundled payment initiative. This subproject has three goals. First, we plan to examine the association between hospital quality and Medicare episode payments. Taking advantage of Michigan's unique clinical outcomes data infrastructure, we will examine surgical cohorts to understand relationships among patient-level outcomes such as risk adjusted morbidity and mortality, measures of technical quality such as hospital safety culture and teamwork, and price-adjusted episode costs. Second, we propose to evaluate the direct impact of the CMMI bundled payment initiative on costs and quality. For the subset of Michigan hospitals participating in the CMMI bundled payment program, we will evaluate the direct effects of this intervention on episode payments and quality of care with targeted conditions and procedures. And finally, we plan to assess spillover and substitution effects of episode payments for the under-65 population, and for Medicare patients with unbundled conditions. Using the CMMI bundled payment program as a shift in relative prices for post discharge services, we will also assess the program's spillover effects on procedures for the under-65 population, and for unrelated and untargeted conditions in the over-65 population.